Getting rich slowly – why the wealthy are buying into SMEs

BCMS explains why private investors are snapping up small companies

Investment portfolios of wealthy individuals have evolved in recent years beyond traditional asset classes, with private investors increasingly choosing to buy, grow and sell existing businesses as a way of making the most of their money.

A company sale creates an interesting proposition for buyer and seller alike.

Will the new owner be hands-on or a ‘sleeping’ partner? Is the company in need of further investment? Could the middle management take on more responsibilities?

The market for buying private companies expanded rapidly during the financial crisis 10 years ago, and has grown steadily since, as family trusts and high net worth individuals adjust their exposure to risk.

At the same time, reduced bank lending and rising costs have increased demand from SME business owners – from heavy engineering to IT consultancies – looking for private investors to help accelerate company growth.

The advantages for an acquirer are clear.

They are buying a proven product or service with established customer base, a reputation, and skilled employees.

Furthermore, the previous owners will have identified and solved many of the problems a younger company is still battling.

Compared to crowdfunding unproven start-ups, investing in established companies offers lower risk.

However, there are downsides for the unwary.

A neglected business may need further investment, or the industry may be in decline or in transition.

However, advisors will examine all this at length during the sale process.

Hands on or hands off?

Typically, private investors need to be willing to pay £500,000 to £5m to secure a majority stake in a good, profitable business as a going concern.

For investors, the next step is to consider what type of company to look for.

‘Fixer upper’ businesses are obviously riskier, whereas ‘steady eddies’ – stable and profitable but ultimately uninteresting – find it harder to get to the sort of growth needed for a decent return on interest.

So for most investors, an SME with under-appreciated growth and lots of upside is the ideal entry point.

A further consideration is around day to day involvement.

Some investors are self-made entrepreneurs from the same industry, and are keen to roll up their sleeves and transform the company from within.

Other investors are family trust funds with other similar businesses, and may be run by professional asset managers in a hands-off fashion.

Investor appetite grows

Around one in 10 BCMS clients sell their company to private investors every year, and the Kingsclere-headquartered business sale advisor has recently launched a new service to match up private investors and existing businesses for sale around the UK.

In one recent example, a London-based chainsaw hire and sale firm was acquired by a wealthy family trust as part of a larger SME portfolio the same sector.

Wealthy individuals have also co-invested with private equity providers to bring in expertise while sharing the risk.

For other investors looking for something to spend time and energy on, deals are structured so the owner can hand over the reins, and leave the new owner to run the business.

For investors looking to add exposure in their portfolio to smaller companies, BCMS offers a free secure web portal to look at companies for sale via bcms.co.uk/lta